If anything, the SA Reserve Bank can also lend to state-owned companies and assist recapitalizing Development Finance Institutions that are expected to play a pivotal role in the bigger scheme of this huge investment spending drive by the government, argues unionist Katishi Masemola.Photo: Bongani Shilubane/ African News Agency (ANA)
If anything, the SA Reserve Bank can also lend to state-owned companies and assist recapitalizing Development Finance Institutions that are expected to play a pivotal role in the bigger scheme of this huge investment spending drive by the government, argues unionist Katishi Masemola.Photo: Bongani Shilubane/ African News Agency (ANA)

OPINION: A case for state-led Investment spending beyond monetary intervention

By Katishi Masemola Time of article published Jun 3, 2020

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JOHANNESBURG - When the Covid19 began some of us warned that the impact of this pandemic would go beyond the health challenges and spiral into social and economic crises.

We then called for government intervention on the social and economic front not to lag the health intervention but for both sets to be simultaneously pursued.

Many analysts and economists agreed on the government unveiling its fiscal and monetary stimuli with the only differences among them being the extent of fiscal stimulus and the nature of monetary packages. 

President Cyril Ramaphosa has since announced R500 billion fiscal stimulus and the Reserve Bank Governor Lesetja Kganyago has since relaxed the reserve requirements by commercial banks by some R540bn and cut repo rate by a combined 3.75 percent since March

The fiscal stimulus is focused on both the social relief and economic recovery measures with businesses expected to be rescued by the economic measures and the citizens to be assisted by the social relief of this R500bn package.

Dr Dennis George argued, in an article (OPINION: Investment multiplier could revive economy on www. busrep.co.za), that the country needs investment spending beyond these unveiled fiscal monetary stimuli and I agree with him as elaborated below.

It is argued that ours is a Covid19 worsened - yet decades-old  triple crises, which exhibited a 38.3 percent joblessness, 60.5 percent poverty rate and the world's widest inequality in an economy that was already in technical recession before Covid pandemic hit our shores.

Firstly, like it has done with the unveiling of stimuli packages, the government must lead an investment spending on the infrastructure rollout, research and development (R&D) programs, and other enablers such as export subsidies for, and import substitution support to, local productive sectors.

Secondly, the government must support, with the initial seed funding, the establishment of new local industries or the growth of existing industries, with import-substitution policies as catalysts. 

There would be little benefit to the country's balance of payments if South Africa continues to mainly export agricultural or agro-processed products yet retains the importation of machinery used in producing those products.

The argument of using locally produced machinery also applies to other manufactured consumables, be they final products or products used for packaging or used for inputs into processing.

Thirdly, it is about time South African beneficiates its mineral deposits than export them as raw materials and it takes the government to champion such projects. It remains unacceptable that diamonds and gold are yet to be processed beyond polishing after 155 years and 135 years of mining those mineral, respectively. 

It has been several decades of mining platinum and other precious metals, and exporting them raw, without any imagination of processing those. The same platinum in manufacturing cartalic converters that "fuels" millions of motor vehicles.

Fourthly, the expected question to be asked will be, "where will the money come from?". The pessimistic answer will be that the fiscus will be unable to fund this spending even if current taxes were to be increased or new taxes, such as wealth or solidarity taxes, were to be introduced.

The optimistic answer is that the central bank has a role to play and it can use the assets side of its balance sheet to directly extend credit at zero-interest rate to, or buy special bonds from, treasury so as to fund this fiscal deficit (investment) spending.

Several economists; including Duma Gqubule, Redge Nkosi, Buddy Wells and Chris Malikane among others; have convincingly argued that both the Constitution and Reserve Bank Act do provide for SA Reserve Bank (SARB) play a role in funding Treasury by way of directly buying its bonds or by offering it zero-interest loans and arguments to the contrary are yet to be convincing.

Fifthly, with this government-led investment crowding in private investors, the spillovers into the economy will lead to a rising aggregate demand as further stimulated by the R540bn reserve relaxation and 3.75 percent repo rate reduction on the monetary side and the R500bn rescue package on the fiscal side.

If anything, SARB can also lend to state-owned companies and assist recapitalizing Development Finance Institutions that are expected to play a pivotal role in the bigger scheme of this huge investment spending drive by the government

Job creation can arise out of new or insulated industries and from the initial infrastructure rollout by the government and consequent expansion in capacity utilization by the private sector based on increased aggregate demand emanating from more people earning an income and those already employed enjoying higher disposable income. 

With more people earning wage income and more money circulating in the economy there will be more goods and services procured, leading to more taxes paid and collected and this increased fiscal revenue will be channelled to fund improved and/or increased education and health care services - a multiplier effect.

Even after fiscal and monetary stimuli there is too little money chasing too few supplies and, therefore, a compelling case for this state-led investment and its needed multiplier effects.

• Disclaimer 1: Katishi Masemola writes in his personal capacity 
• Disclaimer 2: Masemola, who is the former general secretary of the union Fawu, is in a labour dispute

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